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Section 3B- Modules 12/13 Unemployment

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1 Section 3B- Modules 12/13 Unemployment

2 Unemployment

3 Chapter Outline Unemployment Calculation of Unemployment Categories of Unemployment Types of Unemployment Full/Natural/Actual Unemployment

Current Population Survey Every month, 1,600 interviewers working on a joint project of the Bureau of Labor Statistics (BLS) and the Bureau of the Census survey 60,000 households to establish the age and job market status of each member of the household.

Population Survey Criteria Employed: Have a job! The survey counts as employed all persons who, during the week before the survey: 1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business. 2. Were not working but who had jobs from which they were temporarily absent.

Unemployed: Do not have a job! The survey counts as unemployed all persons who, during the week before the survey: 1. Had no employment 2. Were available for work, and either: 1. Had made efforts to find employment during the previous four weeks, or 2. Were waiting to be recalled to a job from which they had been laid off. Perhaps the most difficult point in this chapter to get across to students is explaining the difference between the layperson’s definition of unemployment and unemployment as measured by the Bureau of Labor Statistics. The layperson typically considers anyone who is not working as unemployed. It is worth reemphasizing that a person is only considered officially unemployed if the person is not working but also is actively seeking employment. Here is a good opportunity to ask students a direct question to which they will happily provide several answers. Why might someone be not working and not looking for work? Students will no doubt point to some of the most obvious answers: full‐time student, homemaker, retired etc.

7 Labor Force Unemployment
The Working-age population is divided into those in the labor force and those not in the labor force. Labor Force Individuals aged 16 years or older who either have jobs or are looking and available for jobs. Not included in the labor force- homemakers, full time students, retired persons, in jail, in institutions, armed forces, disabled.

Figure shows population labor force categories. The figure shows the data for May 2005.

9 Unemployment (In millions)

10 The Logic of the Unemployment Rate
People leaving jobs and people finding jobs is constantly in flux! Job leavers > Job finders means unemployment increases.

11 Unemployment Because of this movement of job losers/gainers must look at stocks and flows. Stocks- The quantity of something (unemployed) measured at a point in time. How much inventory on hand. How much money in banks. Number of people unemployed. How many people are in the labor force now. Independent of time. Assessed Now!!!

12 Movement over Time!!! Flow Unemployment
A quantity measured over time (job leavers, job finders) How much earned in a week. Number of people losing jobs every a month. Savings rate per year. Movement over Time!!!

13 Visualizing Stock and Flows

14 Unemployment Categories
1) Job loser 2) Reentrant 3) Job leaver 4) New entrant

15 Job Loser Unemployment
An individual whose employment was involuntarily terminated or who was laid off 40-60% of the unemployed

16 Reentrant Unemployment
An individual who has worked a full-time job before but left the labor force and has now reentered it looking for a job 20-30% of the unemployed

17 Job Leaver Unemployment An individual who voluntarily ended employment
Less than 10% to around 15% of the unemployed

18 New Entrant Unemployment
An individual who has never worked a full-time job for two weeks or longer 10-13% of the unemployed

Graph shows unemployment by reasons. Job losers are the biggest group, and their number fluctuates most. Now ask: do the same ideas apply to unemployed people. (Be sure to be compassionate about the misery that unemployment can bring. You are not claiming that it is not costly. You’re trying to identify the benefits, if any.) You’ll quickly get your students to see that imagining an economy without any unemployment is nearly impossible. If consumers are free to change their decisions about what they want to buy, some goods and services must fall out of favor when others come into favor. The firms making the unfavored products fall on hard times and often their workers are fired or laid off. Sure, these laid off workers could start work right away, cleaning shoes, selling flowers at intersections. But they are better off (in their own opinion) being frictionally unemployed and searching for new jobs. To eliminate this source of unemployment we would need to forbid consumers from changing their buying plans or insist that no one remain idle and get on with doing any job even if it doesn’t earn a wage. Note that if this is how we ran our economy we’d still be using coal-fired stoves and the pony express, and we’d be wearing coonskin caps. There would be no McDonald’s, Federal Express, or Nike shoes.

20 A Century of Unemployment

21 Duration of Unemployment Typical 15 weeks
26 weeks- Unemployment insurance- extended during severe economic conditions 37.1% -find job within one month 31.8% -find job within 2 months 16.3 -still unemployed after 6 months

Unemployment Figure shows the U.S. unemployment rate: 1965–2005 The average unemployment rate between 1965 and 2005 was 5.9 percent.

The unemployment rate increases in recessions and decreases in expansions.

Two Main Labor Market Indicators The unemployment rate The labor force participation rate Unemployment rate The percentage of people in the labor force who are unemployed. Unemployment is an emotionally charged subject and is a good one for reinforcing the important point that economics is positive in contrast to normative. Economists do not make normative judgments as to whether unemployment is good or bad; rather they explain why unemployment exists and what determines its rate. Some students mistakenly compute the unemployment rate as the number unemployed divided by the number employed. Make sure to explain that economists consider the labor force to include not only those who are employed but also those who are unemployed and looking for work. Unemployment rate = Number of people unemployed x 100 Labor force

25 Unemployment Issues * Factors that give a false read on the unemployment rate Duration of Unemployment: The average duration for all employed workers over the past decade is 15.2 weeks. The duration of unemployment increases when the overall activity slows down and falls when it speeds up. Discouraged worker: A person who does not have a job, is available to work, but has not made efforts to find a job within the previous four weeks. Not counted as part of the labor force. Makes the unemployment rate lower than it actually is, would be higher if counted.

26 Unemployment Issues Semi-Hidden Unemployment- Part-time workers who would rather work full-time, but cannot find a full-time job. These workers are counted as fully employed, but should be counted as half a worker. Understates the unemployment rate. Overemployment- Persons who work more than 40 hours a week or who have two jobs. These workers are only counted as one worker. Should be counted as two workers. Overstates the unemployment rate.

Labor force participation rate The percentage of the working-age population who are members of the labor force. Labor force participation rate = Working-age population x 100 Labor force

The Participation Rate The participation rate increased from 59 percent during the 1960s to 67 percent the 2000. Since 2000, the participation rate has fallen slightly. Between 1965 and 1999, the participation rate for women increased from 39 percent to 60 percent. Between 1965 and 2005, the participation rate for men decreased from 81 percent to 73 percent.

Figure 21.3 shows the changing face of the labor market. The labor force participation rate of women has increased.

The labor force participation rate of men has decreased. The average participation rate of both sexes has increased. Students are interested in the different behavior of the male labor force participation rate and the female labor force participation rate. Students will probably believe that the reason for the increasing female participation rate is social, not economic. They will identify changing social attitudes toward women as the major source and probably see the women’s liberation movement as the driving force for this change. While not to deny the importance of attitudes, this area is a good one in which to get students to explore the economic forces that lie behind social attitudes and change. Get them to think about the technological advances that have contributed to more women being in the labor force. Many goods that were previously produced in the household are now mass‐produced and available for purchase— most items of prepared food, for example. New appliances have increased productivity in the home enabling household production in less time—laundry, kitchen, and cleaning equipment for example. The market provides new goods and services that households want but can’t readily make at home—home entertainment equipment (TV, CD, DVD, etc) for example. These changes lead to many families deciding to have two income earners rather than the older tradition of one. It is interesting to let students discuss what they think will happen to the labor force participation rates in the future and whether or not they think they will ever be equal—or unequal in the opposite direction!

Frictional unemployment The unemployment that arises from normal labor turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs. Structural unemployment The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. Ask your class if anyone they know has been laid off. Then discuss whether losing a job creates frictional, structural, or cyclical unemployment. Look at your local examples. If you live in a steel‐producing area, for example, you can talk about local structural unemployment arising from the closing of a steel manufacturer due to international competition. For cyclical unemployment, ask students how they think the business cycle and cyclical unemployment is related to full‐time enrolment at higher education institutions. Students often don’t think there is any relationship. But nationally during a recession the growth rate of full‐time enrolment increases. Ask students if they can explain this relationship. The answer is that during a recession and due to the increase in cyclical unemployment, the opportunity cost of school decreases. This is a great way to keep students thinking about marginal benefits and costs.

Seasonal unemployment The unemployment that arises because of seasonal weather patterns. Cyclical unemployment The fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion.

33 Wait Unemployment Unemployment
Unemployment that is caused by wage rigidities Minimum Wage Unions Contracts –bargain for wages above the market wage, won’t allow workers to work for a lower wage Efficiency Wages- incentives to work harder- creates an artificially higher wage- creates more unemployment Public Policy (unemployment compensation- reduces the incentive to find work)

34 Minimum Wage and Unemployment
Figure The Effect of a Minimum Wage on the Labor Market Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Full Employment Full employment When there is no cyclical unemployment or, equivalently, when all the unemployment is frictional or structural. Natural unemployment rate The unemployment rate when the economy is at full employment. Actual Unemployment rate Full employment + cyclical unemployment

Unemployment and Real GDP Cyclical unemployment is the fluctuating unemployment over the business cycle—unemployment increases during recessions and decreases during expansions. At full employment, there is no cyclical unemployment. At the business cycle trough, cyclical unemployment is positive. At the business cycle peak, cyclical unemployment is negative.

Figure shows the unemployment rate in the United States from 1975 to 2005. As the unemployment rate fluctuates around the natural rate unemployment, … Cyclical unemployment is negative (shaded blue) and positive (shaded red).

Potential GDP is the level of real GDP that the economy would produce if it were at full employment. Because the unemployment rate fluctuates around the natural unemployment rate, real GDP fluctuates around potential GDP: When the unemployment rate is above the natural rate, real GDP is below potential GDP. When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP.

Figure shows the relationship between unemployment and real GDP. As the unemployment rate fluctuates around the natural rate unemployment in part (a), real GDP fluctuates around potential GDP in part (b).

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